EUR 75.00 For Business Accounts Only

Engro Polymer & Chemicals Limited (EPCL): Strong Margins and Capacity Expansion to drive earnings; Initiating Coverage with a ‘Buy’

• We initiate coverage on Engro Polymer and Chemicals Limited (EPCL), Pakistan’s only fully integrated Chlor-Vinyl chemical complex, with a ‘Buy’ rating and a Target Price of Rs40. EPCL offers capital upside of 31% to our TP. The stock is currently trading at a 2020E and 2021F P/E of 6.9x and 5.9x, respectively - which are at a discount of 5%/12% to the market’s multiple. On comparison with regional players EPCL is trading at over 50% discount.
• We believe EPCL is setting itself up, through multiple expansions, to reap the benefits of (1) potential pick up in housing construction activity (from both public and private sectors), (2) low per capita consumption of PVC and (3) conversion towards PVC from traditional steel pipes and products. This is expected help EPCL post 3-year earnings (2019A-2022F) CAGR of 13%.
• The international PVC-Ethylene Core delta has touched its 11-year high in Jan-2020 at US$503/ton as against last 10-year’s average of US$370/ton and 2019 average of US$443/ton. These margins, at least in the near future, are expected to remain sturdy as global PVC market in under supply constraints while ethylene’s market is going through increase in its capacity.
• EPCL is also catering to the Caustic soda market in the southern region of Pakistan, where other caustic soda players are non-existent.

Key risks to our investment case are (1) Sharp decline in PVC-Ethylene margins, (2) Delays in procurement due to Coronavirus, (3) higher-than-expected increase in gas prices, (4) reduction in duty protection and (5) an unfavorable decision on GIDC by the Supreme Court.